What will happen after the U.S. defaults? (x-post from r/Ask_Politics)

The US bond, or T-Bill, is seen as the world's reserve currency, that is that investors and nations across the world see US debt as the safest form of asset (even safer than holding gold). If we were to default, it would probably erase most of this confidence, depending on how long it takes to come up with a solution.

Let's assume no deal is made and we permanently hold the debt ceiling constant, and no tricks like minting a $1t dollar platinum coin are used. What would happen is that we would have a spike in interest rates. Nothing absolutely insane, but definitely damaging to the economy - perhaps 1-4% spike on long term depending on the sell off (this article speculates that foreign investment only lowers rates by .5-1% - yet a "sell off" could create a larger spike).

So we borrow at higher rates, everyone's mortgage is tied to the US Treasury (for the most part), so everyone will have higher mortgages causing less ability to finance houses, more defaults, etc.

The interest rate itself will create recessionary pressure, but the larger and more important question is whether or not the US will remain the financial capital of the world and if the reserve currency of the world will remain the US T-bill.

Wouldn't this interest rate fluctuation apply only to new mortgages? I have a set interest rate and I don't think ARMs are nearly as popular as they once were. Beyond that couldn't one argue that interest rates are absurdly low right now? I recall my parents talking about 9% interests rates back in maybe the 70's? Not to mention aren't increased interst rates good for things like CD accounts? The banks aren't lending very much money as it is with ridiculously low rates.

Letter from the Secretary of Treasury sent today: (shortened it down to show the most important parts)

If the extraordinary measures were allowed to expire without an increase in borrowing authority, Treasury would be left to fund the government solely with the cash we have on hand on any given day. As you know, cash would not be adequate to meet existing obligations for any meaningful length of time because the government is currently operating at a deficit.

The U.S. government makes approximately 80 million separate payments per month... If Congress does not act to extend borrowing authority, all of these payments would be at risk. This would impose severe economic hardship on millions of individuals and businesses across the country.

Even a temporary default with a brief interruption in payments that Congress subsequently restores would be terribly damaging, calling into question the willingness of Congress to uphold America’s longstanding commitment to meet the obligations of the nation in full and on time. It should also be noted that default would increase our borrowing costs and damage economic growth and therefore add to future budget deficits, not decrease them.

It is an immediate default. It isn't a default on all government obligations at once, of course the treasury gets to choose the importance of the obligations, but defaults will occur immediately and to suggest otherwise as you have is just plain wrong.

Default in this circumstance (sovereign currency default) refers to a default on government debt. The steps Geitner is taking is a government shutdown to avoid debt default. Look it up. Default refers to debt, not government spending.

I would be very skeptical of inflation happening during a financial crisis. Why? Assets go down in value because everyone begins to sell at once without enough buyers to keep prices constant. So let's say a bank owns a pool of 100 mortgages worth $1 billion before a financial panic, but after the market melts down the market value is $.5 billion. Every $1 will buy you twice as much as it would before the crisis, so in other words the value of the dollar went up. So typically in financial crises we experience deflation rather than inflation.